Protect Your Loved Ones With a Spendthrift Trust

Providing for someone you care about can be one of life’s
great challenges. You may have a spouse or partner who depends on you financially.
Or a relative with money problems who sometimes turns to you for help. Or
perhaps you are fortunate enough to have children and want to give them every
possible advantage in life. Whoever you care for, your life’s work may well
focus on supporting them.

If someone does rely on you, one of the hardest questions to
consider is what they would do without you. You might be able to provide for
the person financially by leaving them an inheritance under your will or making
them the beneficiary of your life insurance. But money can be squandered, and it
may need to be protected from bill collectors, unscrupulous “friends,” and
possibly even the loved one himself.

One of the most effective ways to avoid these hazards is to
create a “spendthrift trust.” Whether you are leaving cash, securities, real
estate, or the proceeds of an insurance policy, the assets will be managed by
one person, called the “trustee,” for the benefit of your loved one, the “beneficiary.”
The trust can be set up to disburse money in a controlled manner, ensuring that
your loved one is well provided for.

The “spendthrift” provisions protect the trust by preventing
a creditor from “attaching” the assets—essentially, placing on lien on the
trust to satisfy an unpaid debt. Once a distribution is made to the
beneficiary, however, the money does become vulnerable to the claims of
creditors. The best approach, then, is often to give the trustee the discretion
to make or withhold payments as appropriate to help the beneficiary while
protecting the trust principal.

For a child, you might allow expenses related to health
care, education, and general support to be payable in the trustee’s discretion.
These could include the cost of health insurance, braces, a private tutor,
tuition, the down payment on a house, or the cost of a wedding. You could also
include mandatory distributions, such as regular disbursements of any income the
trust generates, as well as payments of principal when the beneficiary reaches certain
life milestones, such as completing college or reaching a particular age.

Under a trust you establish for an irresponsible relative,
the trustee might need broader discretion. In this case, perhaps only those expenses
the trustee considered to be in the relative’s best interest could be paid for
from the trust assets. The trustee could also be required to take into account
other resources that might be available to the beneficiary. For example, if the
beneficiary makes a reasonable income, the trustee could withhold any distributions,
preserving the trust’s assets for things like a financial emergency or eventual
retirement. The assets that continued to be held in trust would then lie beyond
the reach of most creditors.

Another benefit of a spendthrift trust is that it can
protect the beneficiary from himself. Most spendthrift clauses prevent the
beneficiary from using the trust as collateral for a loan or assigning his
interest in the trust to another person. In addition, the trustee can make
distributions by paying the beneficiary’s tuition, medical bills, or other
expenses directly to the provider, rather than having the money deposited into
the beneficiary’s personal bank account. By circumventing the beneficiary
himself, these distributions will also generally not susceptible to creditor
claims.

The commitment to take care of someone you love doesn’t end
when you’re gone. Talk to an experienced estates and trusts attorney to find
out whether a spendthrift trust should be part of your estate plan.

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Author Profile

Lee Carpenter, Esquire

Lee Carpenter is an attorney dedicated to serving Maryland’s LGBT+ community. His practice focuses on estate planning and administration, as well as some family law and business matters. He works in the Baltimore office of the law firm of Saul Ewing Arnstein & Lehr and also teaches Estates & Trusts as an Adjunct Professor at the University of Maryland Carey School of Law. He has written regularly for Baltimore Out Loud since 2014 and is a frequent lecturer on topics related to same-sex marriage and LGBT law. A Maryland native, he is proud to call Baltimore home and lives in the city with his husband and son.